Debunking Keen

Steve Keen’s book Debunking Economics is well written
and addresses important issues from the commanding heights of wit and
clarity. Keen addresses his book to students and those who believe they
have been ‘silenced’ by economics. The book itself promises
two objectives: An exposition of ‘conventional’ theory and
a ‘debunking’ of that theory. Indeed, the back cover promises ‘you’ll
never be deceived by an economist again’. In this, Keen promises
more than he delivers. The book itself is divided broadly into two sections.
The author first sets out and debunks ‘conventional economics’.
The second section sets out some alternative approaches to economics.
Along the way, Keen includes chapters on economic methodology, a defence
of mathematics in economics and a chapter on alternative schools of economic
thought.

Keen has drawn several conclusions by the end of his book. These are
as follows: Neoclassical economics should not and cannot be used for
public policy purposes. This is because neoclassical economics is theoretically
and logically inconsistent. Even if neoclassical economics were not wrong,
the underlying conditions required for its application could never be
met in reality. Keen oversteps the boundary of knowledge, however, when
he also argues that market solutions to societal problems are likely
to reduce human welfare, and that society is greater than the sum of
its parts. Keen either lacks understanding of economics, or how economists
actually go about their art, or— more likely— is somewhat
disingenuous. All in all, Keen has done an excellent hatchet job. Most
of this hatchet job occurs through misrepresentation, although there
is some factual inaccuracy.

Keen rather modestly advises his readers that ‘I am completely
free of the “habitual modes of thought and expression” which
so troubled Keynes’ (p. xiii). This is incorrect. Keen employs
the Keynesian approach very well. This is to make up a very imprecise
caricature of your opponent, and then to demolish that construct. This
is cheap. It would be preferable, and more honest, to follow Paul Krugman’s
approach. Krugman actually names people who propose fallacious theories;
the reader can then do additional research and draw informed conclusions.

In addition, while Keen attacks neoclassical economics, he specifically
limits his attack to undergraduate economics. Indeed, he makes a classic
undergraduate mistake. In his chapter on the theory of the firm, he is
confused by the definition of the term ‘monopoly’. Economists
define a monopoly as being a single firm in a single industry. Keen seems
to think that a monopoly is any large firm. Worse, when not misrepresenting
views, he manufactures them. For example, he writes that if the world
operated as neoclassical economists says it should then ‘income
should go to those who deserve it’. Most neoclassical economists
would argue, however, that income should go to those who earn it.

Keen does an excellent hatchet
job, mostly through misrepresentation, although there is
also some factual inaccuracy.

Keen is particularly concerned about the policy advice of neoclassical
economists. Economists, it seems, have attempted to remake the world
in the image of their theoretical models. Politicians and bureaucrats
have simply and uncritically accepted this advice. Indeed, politicians
and bureaucrats have continued to accept this advice even though it is
wrong, and the world is worse off as a consequence. Now it is true that
many economists are contemptuous of politicians, but Keen must believe
that politicians are intellectually challenged. Herein lies a problem
for his argument. In his introductory chapter, Keen acknowledges that ‘only’ the
parties of the middle follow economic policies. Unfortunately for his
argument, these are the political parties that invariably form government.
It would appear then that not only do political parties follow incorrect
policies, but that the electorate also does not know its own self-interest.
Economists try to avoid making these types of value judgements. Keen’s
somewhat arrogant implication is that he knows the electorate’s
self-interest whereas it does not.

There is a literature that investigates the relationship between economists
and public policy. George Stigler, for example, has written extensively
on the issue (see Leube and Moore, 1986). Keen, however, does not refer
to that literature. Contrary to Keen’s view, it is not clear that
economists have ‘convinced’ politicians that their models
are correct. It is more likely that politicians have realised that their
preferred policy options need economic justification, and have simply
sought out economists who would confirm pre-existing views. Consider
one of the biggest economic policy backflips in the twentieth century:
the abandonment of fixed exchange rates. There is no evidence to suggest
that policy makers were convinced by economic arguments against fixed
exchange rates. Rather the policy change occurred because Bretton Woods
had become unworkable in practice.

The empirical component of Keen’s argument is exceptionally poor.
He proceeds by way of disproving mathematical identities and theorems.
If the mathematics is wrong, he argues the economics is wrong. He also
argues, paradoxically, that economists are poor mathematicians. It seems
economics must be wrong by definition. This is the well-known maxim, ‘That
is all very well in practice, but it does not work in theory’.
If economics is wrong in theory then Keen should be able to demonstrate
errors in public policy.

Contrary to Keen's view, it
is not clear economists have "convinced" politicians
their models are correct.

Keen does have a ‘So-what?’ section in many chapters, but
they are often incomprehensible. For example, he argues that economists
cannot explain wage determination because ‘the inequality which
is so much a characteristic of modern society reflects power rather than
justice’. Neoclassical economics has no theory of ‘justice’,
but Keen’s intended audience would not know that. In another chapter
he introduces the macroeconomic provisions of the Maastricht Treaty as
an example of where economists are in error. The driving force for the
European Union, however, was not economic theory. Many economists, including
Paul Krugman, have argued against the European Union. Again, Keen’s
readers are unlikely to know this. Other empirical statements are simply
not referenced. The reader is invited to believe statements such as ‘One
of the most striking aspects of the late 20th century was the increase
in the gap between the poorest worker and the richest’ on face
value.

Keen is at great pains to emphasise that his argument should not be
characterised as a ‘left versus right’ debate, nor should
we dismiss him as simply being a ‘left-winger’. He is a disinterested
observer in the pursuit of truth. Not so: His ‘left-wing’ value
judgements condemn him. In his arguments against neoclassical policies,
Keen makes much of the Sonnenshein-Mantel-Debreu (SMD) conditions. These
conditions set out when the economic analysis of an individual can be
extrapolated to ‘society’ at large. This is a variation of
the ‘Arrow-impossibility theorem’, wherein Kenneth Arrow
demonstrated that it is not possible to aggregate individual preferences
in any meaningful way. Many neoclassical economists proceed in their
analysis as if Arrow’s impossibility theorem did not exist, or
the SMD conditions were met. This is a failure of much of neoclassical
economics. Keen, however, uses the SMD conditions to argue that ‘society
is more than the sum of its individual members’. How does he know?
Many on the ideological right interpret Arrow’s theorem, as Margaret
Thatcher does, as implying ‘There is no such thing as society’.

It is here, and in his unsubstantiated value judgements, that Keen identifies
himself as being from the left. That does not mean that his arguments
are inherently wrong, but he does have an agenda beyond simply telling
the truth.

It is too easy to be seduced
into empty slogans and dogma. But that does not mean the
dogma is wrong.

To be blunt, Debunking Economics is yet another tome dressed
up in academic respectability that preaches left-wing views and opinion.
It must be considered as one of many books critical of ‘economic
rationalism’. This is most unfortunate and disappointing. Keen
is capable of better. The issues he raises are important and should be
discussed. Keen, however, has given up the argument, as he indicates
in the first chapter, ‘No more Mr Nice guy’. It is not good
enough to argue that economics is wrong because hooligans protest outside
Nike stores and the World Bank. Something is wrong with how undergraduate
economics is taught. The quality of economic analysis in Australia is
poor. It is too easy to be seduced into empty slogans and dogma. But
that does not mean that the dogma is wrong.

Keen believes that markets do not work well. It is possible that they
don’t work well relative to a mathematical ideal, but do they work
in practice? Consider a simple thought experiment: Take an economy and
arbitrarily divide it into two pieces. Allow the market to operate in
one piece, and government to run the economy in the other piece. Fast
forward by fifty years and observe what has happened. It turns out that
West Germany and South Korea prospered relative to East Germany and North
Korea when this experiment was actually conducted. If market economics
is wrong, Keen needs to explain this ‘anomaly’.

Keen’s book will get the attention it deserves, on average. Those
who are already predisposed to his views will quote it. Those who are
not so predisposed will not read it. To that extent, Keen has not contributed
to a debate, but rather to a tirade.